Financial Statement Fraud - UNIVERSAL PUBLISHERS

Financial Statement Fraud:

Motives, Methods, Cases and Detection

Khanh Nguyen

Boca Raton

Financial Statement Fraud: Motives, Methods, Cases and Detection

Copyright ? 2008 Khanh Nguyen All rights reserved. No part of this book may be reproduced or transmitted in any form or by

any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without written permission from the publisher.

Boca Raton, Florida

USA ? 2010

ISBN-10: 1-59942-319-7 ISBN-13: 978-1-59942-319-7

Abstract Financial reporting frauds and earnings manipulation have attracted high profile attention recently. There have been several cases by businesses of what appears to be financial statement fraud, which have been undetected by the auditors. In this Project, the main purpose is to focus on the nature of financial statement fraud, and fraud schemes regarding to financial statements. The Project also discusses common techniques used to detect financial statement frauds. Two cases of the fraudulent financial statements of Enron and WorldCom are analysed.

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Table of contents Page

1. Introduction....................................................................................... 1 1.1 Background..................................................................................... 1 1.2 Research Issue and Purpose.................................................................. 2 1.3 Scope and Limitations......................................................................... 3 2. Overview of Financial Statement Fraud...................................................... 3 2.1 Definitions of Fraud and Error................................................................ 3 2.1.1 Fraud.......................................................................................... 3 2.1.2 Error........................................................................................... 4 2.2 Types of fraud.................................................................................. 4 2.3 Definitions of Financial Statement Error and Fraud....................................... 5 2.4 Types of financial statement fraud........................................................... 7 2.5 Who commit financial statement fraud? ................................................... 8 2.6 Why do people commit financial statement fraud? ........................................ 8 3. Financial statement fraud schemes............................................................ 10 3.1 Double-entry book-keeping.................................................................. 10 3.2 Accounting equation and financial statements.............................................. 11 3.3 Fraud schemes.................................................................................. 12 3.3.1 Selling more (overstatement of sales revenue)........................................... 12 3.3.1.1 Sales (revenue) in improper periods..................................................... 13 a) Bill and Hold Sales Transactions.............................................................. 13 b) Channel stuffing (trade loading)............................................................... 14 c) Improper cut-offs of sales...................................................................... 15 d) Shipping goods before a sale is finalized..................................................... 15

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